Japan, South Korea Face Higher LNG Costs to Meet Power Shortfall

In recent weeks the LNG market in Asia has grown tighter as a confluence of events has conspired to drive up spot prices. In an October 29 column, Clyde Russell of Reuters details three trends currently squeezing LNG supplies. First, in September Japan shut down the last of its remaining nuclear reactors for maintenance, meaning Japan is running a nuclear-free power sector for only the second time in 40 years. Some power operators have applied for restarts, and while the government supports a return to nuclear power, approval remains months away.

To fill the gap in power supply, Japan – already the world’s largest importer of LNG – has had to lean even more heavily on imported gas. LNG now accounts for half of Japan’s electricity, nearly double the share before the Fukushima disaster. Power rationing has helped ease the burden, but higher demand for heating in the winter is putting upward pressure on prices.

Second, South Korea has also reduced its nuclear output recently. A corruption scandal over faked safety certificates has rocked the Korean nuclear industry, forcing six reactors to shut down. Like Japan, South Korea will have to get more LNG to make up for the shortfall.

Finally, China, traditionally a rather middling consumer of natural gas, is pushing hard to replace its massive fleet of coal-fired power plants in order to reduce the smog that is choking its cities.

Taken together, these events have forced LNG spot prices in Asia over $17 per million Btu (MMBtu) at the end of October, from $14.13/MMBtu earlier this year.

That spread has natural gas producers in the U.S. scrambling to build export facilities to take advantage of the seemingly easy arbitrage opportunity. The Department of Energy hasapproved four export terminals as of October 15, 2013, the latest of which located on the Chesapeake Bay, could take advantage of natural gas coming out of the vast Marcellus Shale. But these export terminals, if they are built, will not be online for several years.

Over the long-term, the market for LNG in Asia will soften – and the window for U.S. suppliers will be brief. The spread is large now, but supplies from other areas are expected to come online in a few years. Australia is poised to triple its LNG exporting capacity by 2018, and its projects are further along than their American competitors. Moreover, if Japan returns to nuclear power over the medium-term, demand will moderate. More supplies and easing demand will restrain prices.

Still, in the short-term, demand for LNG on the spot market in Asia is high, and the market may continue to tighten in the coming months. This means Japan and Korea, both of which already suffer a high economic toll from imported energy, will be dishing out even more to compensate for their lost nuclear power.